Abstract

PurposeCorporate firms often follow their peer firms to articulate multiple financial decisions. Among the others, trade credit policy is a vital financial decision that can impart its dynamic role in achieving financial efficiency. Therefore, the current analysis aims to assess the role of herding behavior in determining the trade credit policies of corporate firms and its relevant effect on corporate financial performance.Design/methodology/approachFor this purpose, the financial data of 13089 nonfinancial sector firms from 50 countries are employed and the dynamic generalized method of moments (GMM) model to estimate the regression is applied.FindingsThe empirical findings first reveal that corporate firms actively mimic their peer firms regarding trade credit policies. However, this mimicking behavior hampers the financial performance due to noncompatibility with peers’ trade credit policies. Peer firms often develop such trade credit policies that are not applicable to corporate firms.Practical implicationsMainly, the findings of the study suggest two implications. First, it highlights the peer effect in terms of trade credit patterns. Second, it elaborates an adverse effect regarding financial performance due to herding of peers’ trade credit policies.Originality/valueThis study adds new thoughts regarding herding behavior in terms of trade credit policy and its possible consequences for corporate financial performance. No study explores such a relationship.

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